Saudi Output Cuts and Strong U.S. Dollar Spells Calamity for Crude Prices: Analysts

This is an "almost unbearable burden" for the market. File Image / Pixabay

Saudi Arabia cutting its oil production in July and the prospect of continued strength in the U.S. dollar may not seem to have anything in common; but both are yet more indicators that crude prices will likely continue to drop in the foreseeable future, according to the experts.

At face value, news on Monday that the Saudis cutting back on drilling last month after agreeing with the Organization of the Petroleum Exporting Countries (OPEC) to put more barrels on the market could have been interpreted as a sign that the kingdom may be incapable of ramping up production to compensate for an expected removal of Iranian crude in November due to the U.S. sanctions taking effect - a scenario that could cause prices to skyrocket.

However, the cutbacks, which were reported by OPEC in its latest monthly report, were accompanied by a disclosure from the cartel that the Saudis were merely determined to avoid a return of oversupply - and that oil output in July rose to 32.32 million barrels per day (bpd), higher than the 2019 demand forecast by 41,000 bpd.

Moreover, OPEC expects world oil demand to grow by 1.43 million bpd, 20,000 bpd less than forecast last month and a slowdown from 1.64 million bpd in 2018 - yet another factor that may keep a lid on any crude price rises.

As for the threat of a continued strong U.S. dollar, Tamas Varga, senior analyst at PVM, stated in a research note published Monday that it should be of even greater concern to traders than the mounting trade wars between the U.S. and China.

He explained the most obvious thing that could change escalating oil prices due to Iranian crude being removed from the market "is not the U.S.-China trade war, but the strong dollar that, if (it) lasts, will put (an) almost unbearable burden on consuming countries" - because a stronger dollar makes oil more expensive to much of the world, so oil prices tend to fall as the dollar rises;

Other experts see nothing but price declines on the horizon, including Paul Hickin, EMEA oil analyst at S&P Global Platts, who told CNBC that "With these risks from sanctions, from the escalating trade war with China, and even from smaller local things like with Turkey, it all feeds into a risk to the demand picture further out."

Monday's disclosures are merely the latest addition to a growing body of evidence pointing toward more crude price declines: last week it was learned that crude imports to China in July, while having picked up after two months of decline, were still among the lowest of the year; and Iraq cut its official selling price for September cargoes of Basra Light crude for its Asian customers.